Are Cupcakes Still a Sweet Spot for Business?

A handful of big-name players within the cupcake industry are betting that America’s cupcake obsession will continue as they embark upon ambitious expansion plans.

Soucrce: Georgetown Cupcake

Hummingbird cupcake

Recent data backs up this confectionery gamble — but with a caveat. Growth within the cake decoration stores industry is expected to slow to 3.7 percent annually over the next five years, according to an October 2011 report from research firm IBISWorld. This forecast represents a dip from the 4.9 percent growth that the industry was predicted to have enjoyed during the past five years.

“The market is becoming more and more saturated as cupcake stores open, but ones like Crumbs or Sprinklesthat have a more recognizable brand can succeed,” said Mary Nanfelt, the report’s author.

Several high-profile cupcake brands are in the midst of expansions from Boston to Beirut.

Magnolia Bakery — one of the most recognizable cupcake shops, made famous by the hit TV show "Sex and the City" — aims to add 200 stores within the next five years, said Bobbie Lloyd, the company’s operating partner and president.

One franchise location opened in February 2010 in Dubai while another is currently under construction in Doha, Qatar — thousands of miles from the company’s original New York City location.

“We’re working on agreements in other places such as Russia, Japan, Morocco, Turkey and China, so that’s the world-domination factor, which is always our internal cupcake joke,” Lloyd said.

The cupcake’s reputation as a small luxury at an affordable price has fueled growth within the bakery industry.

“I think that when times are tough, people can still afford $2.75 for a cupcake,” said Katherine Kallinis, one half of the sister duo who founded Georgetown Cupcakein 2008. “It’s a luxury that everyone can afford — it’s not going to break the bank.”

Kallinis and her sister Sophie LaMontagne are the stars of TLC's "DC Cupcakes," which is currently in its third season. In February, they opened the company’s third location, in New York City’s SoHo neighborhood. Another location is set to open in Boston in May.

Although the pair eventually wants to expand their business to the major cities and open a location on the West Coast, they do not want to franchise their business. Instead, they plan to keep their locations privately owned.

Source: Magnolia Bakery

Magnolia Bakery

“Our approach is that we want to keep Georgetown Cupcake special, and there’s a way to do that without being on every street corner,” LaMontagne said.

Although franchising is becoming more popular, aspiring bakers can still prosper if they choose to launch their own concepts, Nanfelt said.

“People like to buy local now and support the small businesses,” she said about franchising. “It’s important for the larger cupcake stores, but small bakeries can survive if they create a loyal clientele.”

No company currently dominates the highly fragmented U.S. cupcake business, but Crumbs Bake Shop is the largest retailer of cupcakes. The company went public at the end of June, but its shares have since fallen sharply.

Still, the company plans to expand to 200 locations from its current 50 by the end of 2014. Although Crumbs plans to expand, the company said in its in fourth-quarter earnings report that it may close some existing locations.

“In 2012, the Company has already opened 2 stores, is in the construction phase with 2 other locations, and anticipates opening between 5 and 7 mall-based stores within the Boston to Washington, D.C. corridor,” the report said. “In addition, the Company may also selectively look to terminate some existing leases as part of its efforts to strengthen its overall portfolio.”

As cupcake stores sprinkle their locations across the U.S., Nanfelt said they face a number of challenges. In recent years, volatile commodity prices for flour, sugar and milk have dented bakery profits. This year, egg prices are expected to increase 2.9 percent, while sugar prices are expected to increase 6.4 percent and milk 1.6 percent, the USDA forecasts.

Consumers are also becoming more health conscious, moving away from sweets while bakeries are experiencing stiffer competition from grocery stores and mass merchandisers, such as Costco , that sell baked goods at a lower price.

But the biggest challenge for the cupcake may also be the key to its current success.

“It depends on the trend of cupcakes and if it will remain popular with consumers; that’s unpredictable,” Nanfelt said. “The trend could easily change. Food trends change often.”